DETAILED INFORMATION ABOUT TENANCY DEPOSIT PENALTIES AND SECTION 21

More about the new rules: -

There are currently three statutory tenancy deposit protection schemes. Any deposit paid by a tenant in relation to an assured shorthold tenancy must be dealt with under one of these. They are the DPS custodial scheme where you pay over the money received to the scheme. The other two schemes are insured schemes operated by My Deposits and TDS. The RLA operates a special arrangement with TDS for private landlords Deposit Guard. For more details of the RLA scheme CLICK HERE. To protect the deposit with My Deposits or TDS you must comply with the schemes deposit registration requirements. With My Deposits and TDS a fee is payable to protect the deposit. No fee is payable with DPS. Please note that it is important not to wait until the last minute because it is your responsibility to make sure any payment required is cleared within the 30 days allowed to avoid breaking the rules.

At the moment if you do not protect the deposit on time or fail to give the prescribed information then, so long as you do so before the Court hearing if an application to claim the penalty is made, you can avoid paying the penalty (but may have to pay legal costs). This is what is all set to change.

Under the new rules there will be a strict 30 day time limit from when you receive the deposit. There is no power to extend this time limit. Just receiving part of the deposit does not excuse you from having to protect whatever you receive. You must not wait until you receive the full deposit. The 30 day time period runs from the date of receipt and includes the date of receipt itself. If you only receive part of the deposit protect what you receive within the 30 days allowed and then protect the remaining deposit when you receive it. This means that you will have to pay an extra fee but this will be far cheaper than paying the penalty.

The law requires you to give the prescribed information as well as protecting the deposit. This is not the same as just giving the tenant the official receipt received from the scheme administrator. It is a detailed statement regarding the deposit and must be accompanied by an explanatory leaflet which each scheme issues for the tenant. The scheme itself does not give the prescribed information to your tenant as it is the landlord’s responsibility to do so. Many landlords may protect the deposit properly but do not realise that they have to give the prescribed information as well. Scheme websites have the necessary forms as well as the scheme leaflet which must accompany the prescribed information form. Make sure you complete the prescribed information fully and accurately. The tenant must be given the opportunity to countersign it. It is important to ensure that the prescribed information is completed fully and accurately. For instance it is important to make sure that you include a contact address for tenants once the tenancy has finished. Obviously, they may not know where they are living but you need to obtain an include a c/o address or a parents address for example.

Additionally as well as the prescribed information you must give the tenant a copy of the official receipt that you receive from the scheme. This is required under the scheme rules. With My Deposits the official scheme receipt gives some of the prescribed information but not all of it.

When the new rules come into effect if you fail to protect the deposit/give the prescribed information within 30 days of receiving the deposit then the tenant (or a third party who pays towards the deposit) can claim a penalty. Former tenants are able to make a claim as well. There is a minimum penalty of once times the deposit with a maximum of three times the deposit. The Court is given a discretion and unlike under the old system where there was a mandatory three times the deposit penalty. The Court will take various factors into account such as why you failed to protect the deposit, how long it was before you protected it and so on. Orders for penalties can now be made independently of orders dealing with the deposit itself. If the tenancy is still continuing the Court must order the full deposit to be repaid to the tenant or paid over to the custodial scheme (DPS). Where the tenancy has ended an order to repay must be made and if the landlord (or agent) still holds the deposit an order to repay it can be made in favour of the applicant. Such an order, once the tenancy has ended, can be an order to repay the deposit in all or in part. This leaves it open for the landlord to make a claim on the deposit eg. to claim for rent arrears.

Schemes will protect deposits late but both My Deposits and TDS require a good reason why it was protected late. They may charge an extra fee. They can refuse to accept late protection. DPS will always accept deposits.

To obtain a penalty for breaking the rules the tenant will have to apply to the Court as at present. You may incur legal costs as a result. Penalty claims should be made under Part 8 of the Civil Procedure Rules (not in the Small Claims Court). This means the costs can be claimed even if the amount claimed is under £5,000. Court fees paid can also be claimed back. Claims for a penalty could be settled by agreement outside Court proceedings but there should be a written agreement. However, as you may want to use a Section 21 notice the penalty must then be dealt with through Court procedures; otherwise you do not regain the right to serve a Section 21 notice.

If you have previously properly protected a deposit which you still hold it but it is no longer protected for some reason before the tenancy ends then the penalty can be claimed and you cannot use a Section 21 notice. This can arise if there is a need to reprotect the deposit e.g. if the tenancy is renewed or the tenancy terms are altered. The legislation also allows a claim for a penalty where a tenant is notified by the landlord that the deposit paid is paid by a particular scheme. The tenant can check with the scheme administrator but if the tenant is unable to obtain confirmation that the deposit is being held and protected by that scheme then a claim can also be made for a penalty. In such a case a penalty (between 1x and 3x the deposit) can be ordered if the Court is not satisfied that the deposit is being protected in accordance with one of the authorised schemes. The same rules apply then regarding the deposit itself – see paragraph 6 above. An application can be made in this situation even after the tenancy has ended (presumably assuming the deposit has already been refunded/dealt with by agreement between the landlord and the tenant/by Court Order/under the relevant adjudication procedure).

As indicated above, once the new rules apply, if you fail to protect the deposit within 30 days after receiving it then you lose your right to use a Section 21. This is the other big change. The only way you can get it back is to return the deposit in full to the tenant or make an agreement with the tenant about deductions from the deposit. Otherwise there has to be an application by the tenant to the Court for an Order to pay the penalty and this has to go through the Court procedures. It could be dealt with by a ‘Consent’ Order if agreement is reached as to how much penalty has to be paid (minimum once times the deposit/maximum three times the deposit).

Failure to comply with the deposit rules does not stop you using other grounds for possession e.g. Ground 8 because there are two (2) months rent arrears. However you must always remember that the tenant could claim the penalty and then the amount of the penalty can be set off (i.e. deducted) from the amount of the arrears. You may be owed two months rent but then the penalty would be deducted from this. Depending on the amount it could leave you below the two month arrears that triggers the mandatory ground for possession under Ground 8. Thus taking Court proceedings for possession could invite a claim against you for the penalty.

Remember not only will the tenancy deposit have to be protected within 30 days of receipt if you want to use Section 21 but you must have given prescribed information (along with the tenant’s leaflet).

The intention is that these provisions will be back dated so that if a landlord is currently holding an unprotected deposit and/or has failed to give the prescribed information once the new provisions are in force the new rules regarding penalties/not being able to use Section 21 will apply. Therefore it is vital to get the deposit protected now and give the prescribed information now as the current regime is far more favourable to a landlord who has defaulted than the new one will be when it comes into operation.

At the moment you can give a Section 21 notice so long as you protect the deposit/give the prescribed information even if it is late. The intention of the new rules is that if you have not protected the deposit within 30 days then you can not use Section 21 at all, even if you subsequently protect the deposit. The only way round this as indicated above, is to return the deposit (or come to some agreement about deductions with the tenant). Otherwise you only get it back if a penalty is claimed via the Court. You can put right the failure to give the prescribed information/leaflet requirement but you cannot put right the failure to protect the deposit in the first place and get your Section 21 rights back simply by protecting it late in one of the schemes. Even then the penalty can still be claimed.

Remember if someone other than the tenant pays or contributes towards the deposit, e.g. a tenant’s parent they must also be given the prescribed information. The tenant must always be given this information even if they have not paid towards the deposit. You must also give them the official scheme leaflet. The rule call such a person a “relevant person”. The relevant person is defined by the legislation as “any person who, in accordance with the arrangements made with the tenant, paid the deposit on behalf of the tenant”. It is not clear whether this means that the third party must actually pay the deposit (or part of the deposit) over to the landlord (or agent) or whether it is enough for them simply to contribute towards the deposit. Obviously, the landlord (or agent) will be aware of the circumstances in the first case but not necessarily in the second case. It is important, therefore, to check the position with the tenant to obtain details of any such third party who is paying the deposit (or paying towards the deposit).

In some situations, even if the deposit is protected at the outset (and prescribed information is given as required), it may become necessary to re-protect the deposit. This can apply, for example, if the tenancy is renewed or if a change is made to the tenancy (eg. a new tenant is added/removed). Provision is made for this in the relevant scheme rules.

More information on this particular topic is given in answer to the question “What happens when the fixed term of the tenancy runs out/the tenancy is renewed?

Where can I find out more details of the legislation?

The relevant provisions are set out in the Housing Act 2004, Sections 213 to 215, as amended by the Localism Act 2011, Section 1 and 4. CLICK HERE for a full revised version of the Legislation.

There will be a commencement/transitional order to implement the new provisions but this has yet to be published.